ATO digs in on private equity

The Australian Taxation Office would have been “derelict" in its duty if it hadn’t targeted two private equity funds with legal action over tax bills, tax commissioner
Michael D’Ascenzo
said.

Hitting back at widespread industry criticism, including from the Aust­ralian Private Equity & Venture Capital Association, about the Tax Office’s handling of the issue, Mr D’Ascenzo questioned whether private equity investment contributed to the prosperity of the ­economy.

The Tax Office caused a stir among private equity firms and their advisers in the past 18 months, when it twice used legal injunctions to try to stop the funds from transferring their profits out of Australia.

The high-profile cases involved TPG Capital, the former private equity owner of
Myer
, in 2009 and Resource Capital Funds last December.

Speaking on the contentious issue for the first time since the Tax Office issued an industry-wide determination last month, Mr D’Ascenzo told The Australian Financial Review that the dramatic actions had not been taken lightly.

“If we didn’t do anything, we would be derelict in our duty," Mr D’Ascenzo said.

“You saw in the Myer case that the money goes offshore very quickly."

He dismissed claims from some tax professionals that the Tax Office was too slow to act after Myer’s ­owners, TPG Capital, transferred $1.5 billion offshore after selling its 80 per cent stake in the retailer in November 2009. The Tax Office belatedly tried to freeze its bank account and issued the firm with a still-disputed $678 million tax bill.

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“The reason we’ve tried not to be public, and the reason why perhaps we may have seemed to be slow, we’ve actually wanted to be very careful about action that could impact on the market response to a float," Mr D’Ascenzo said.

“So, actually being cautious and being concerned about the economic impacts of our action has sometimes had us branded as [initiators of] ­bungled arrangements."

The Tax Office issued two final determinations in December that stated that the sale of private equity assets were generally revenue profits and not capital gains, which are tax exempt for foreigners and taxed concessionally for resident taxpayers.

The Tax Office confirmed it would apply tough anti-tax avoidance laws against firms using cross-border arrangements designed to take advantage of treaties and tax havens.

While acknowledging that factual circumstances varied from case to case, Mr D’Ascenzo said it was quite clear in his mind that the firms were almost always making a revenue profit.

“The general thrust of the business models for offshore leveraged buy-outs is it’s a very ‘get in quick, get out quick’ methodology," he said. “When you come to that point of view we think it’s on revenue account."

“If you have a private equity firm through a leveraged buyout that acquires a company in Australia and works that company for 10 years or so, then it can change it from a revenue profit to a capital profit."

Mr D’Ascenzo said he worried about whether the Tax Office’s actions hindered foreign investment, as the industry claims, and that was why it engaged with Treasury on ­policy matters.

“At the end of the day I have to apply the law the way I honestly believe it does apply," he said.

“The question that arises is twofold. How much is that impact? The second proposition is . . . foreign investment that is fleeting might not be all that productive to the long-term prosperity of this country. They are questions for the government."